Tuesday, January 25, 2011

"The Reinvestment Fund, a community investment group and a national leader in financing of neighborhood revitalization, signed a 15-year lease for 20,702 square feet at 1700 Market Street in Philadelphia, PA.

The 32-story, class A office building totals 841,172 square feet and features a convenience store and a fitness center. The building was originally built in 1968 and was renovated in 1989. The building is Energy Star rated with 77 points awarded in November 2010."

"Jay Several of Several Properties Group acquired the former Cherry Hill Toyota property in Cherry Hill, NJ and plans to redevelop part of it into a retail strip center. The 15,500-square-foot repair and service building and the 10,000-square-foot showroom, located at 50 Haddonfield Rd. in the North Camden County submarket, had been vacant for about six months.

The showroom is being redeveloped and is currently waiting on approvals from the county. Advanced Auto Parts has already submitted a letter of intent to lease space once the project is complete. This is the second redevelopment project Several Properties Group has been a part of; the company also redeveloped 818 Haddonfield from an industrial building into a strip center, which was fully leased prior to its completion in mid-2010. Several added that he has plans for another project in the same Haddonfield corridor, but he isn’t releasing any plans yet."

Monday, January 24, 2011

"HardMetrics, a provider of performance management and operational analytics solutions for call center driven organizations, selected Wayne, PA as the location for its new corporate headquarters.

The new headquarters, at 565 East Swedesford Road, is in the heart of the Route 202 Technology Corridor in the suburbs of Philadelphia. HardMetrics has entered into a 3.5-year lease with Brandywine Realty Trust, the property's owner."

"The accounting profession is currently evaluating a proposed new standard that promises to fundamentally change the ways landlords and tenants account for — and negotiate — leases.

Under review is a proposed rewriting of the Financial Standards Accounting Board’s Accounting Standards Codification Topic 840, which before 2009 was known as FAS 13. This topic, "Accounting for Leases," is one of many standards that together comprise generally accepted accounting principles, or GAAP, in the United States.

The draft standard has drawn much heated debate for its potential to fundamentally change the leasing market, likely shortening lease terms and dramatically reducing the apparent value of properties with traditionally long lease terms, such as office buildings.

What Is Being Proposed?According to FASB, the proposed new rule responds to dissatisfaction with the way that operating leases are disclosed on companies’ financial statements. Current financial standards draw a distinction between operating leases — the standard landlord/tenant relationship — and capital leases, typically used as an alternative form of financing. Current rules effectively ignore the documented structure of capital leases, instead treating the leased property as if it were owned by the tenant and financed by the landlord.

FASB notes that many companies have carefully structured their leases in view of the current rules to achieve characterization as either operating leases or capital leases, resulting in strikingly different effects on the company’s financial statements. The proposed rules to a large degree would prevent this by treating all leases with a term over one year as capital leases.

The proposed new standard treats the execution of a lease as the conveyance to the tenant of an asset — the right to use the property — and the creation of a liability — the obligation to pay rent over the term. The standard creates one analysis for the inception of the transaction and a slightly different one for ongoing reporting. It also requires both landlord and tenant to adjust underlying assumptions about the future of the lease as facts that might affect those assumptions change.

Tenant ChangesFor the tenant the new standard would require the following considerations.

•At the beginning of the lease, the tenant must recognize as a liability the present value of all lease payments it is obligated to make, taking into account any extension or termination options it is likely to exercise, and estimating any contingent rent or termination payments it expects to make. The discount rate to be used for the present value calculation is the interest rate the tenant would have to pay a lender for a comparable real estate secured loan.

•The tenant recognizes the right to use the property for the term of the lease as an asset, measured, at the beginning of the lease, at the present value of the lease payments, plus the “initial direct costs” it incurs in negotiating the lease, for example, broker’s commissions and legal fees.

•During the term of the lease, the tenant amortizes the right to use the property over the shorter of its remaining useful life or the term of the lease.

•During the term of the lease, the tenant must reflect any changes as they occur. For example, if, a few years into the lease, a tenant’s business changes so as to make it likely that it will pay more contingent rent over the term of the lease, its financial statements must immediately reflect that change. Or, if a change in the tenant’s business makes it more likely that it will not exercise an extension option it previously expected to exercise, it may be required to adjust its financial statements to reflect that.

Landlord ChangesFor the landlord the situation is a bit more complex. The new standards call for the landlord to determine whether, given the term of the lease and the terms and conditions of the lease, it has retained “significant exposure to the risks and benefits” of the leased property. For example, if the rent is largely contingent rent or if the tenant has a kick-out option after just a few years, then the landlord is well exposed to the vagaries of performance of the tenant’s business. Or, if the lease is fixed rent but the term is only three years and the leased improvements have a much longer useful life, the landlord still retains most of the risks and benefits of ownership of the leased property.

If, under the soft tests proposed in the draft standard, the landlord determines that it does retain significant risks or benefits associated with the asset, then, at the inception of the lease, it will recognize the right to receive lease payments, by calculating the present value of the stream of expected lease payments using several possible discount rates, in particular, the yield that the rents represent on the value of the real property, which is the annual rents divided by the value of the property.

After inception, the landlord must continually evaluate the lease and leased property based on its amortized cost, and the corresponding lease liability based on the “pattern of use” of the property by the tenant. And, like the tenant, the landlord must adjust its financials to account for such items as changes in the tenant’s business, whether, in the landlord’s judgment that the tenant will or will not exercise any extension or termination options it may have or will pay more or less contingent rent.

If the landlord comes the conclusion that it does not retain significant exposure to the risks and benefits of the leased property, such as where it has leased the property for most of the improvements’ remaining useful life, then it may no longer recognize the property as its asset, but instead may recognize only the rental stream, calculated at present value as described above, plus a factor for the residual value of the property at the end of the lease. In making this calculation, the landlord must make various estimates of the probability of various lease terms where the tenant has options to extend or terminate the lease, as well as the probability of receiving various imagined levels of contingent rent.

CriticismsAs noted, the proposed standard has come under a number of criticisms. For one thing, it assumes a level of information, certainty, or ability to calculate probability simply not present in the real world. Both landlords and tenants will be put the to burden of calculating probable future contingent rents and probabilities of exercising future options that real estate practitioners will recognize as at best wild guesses, not necessarily leading to more reliable financial statements.

The standard in many respects converts operating lease rentals, which are based on very specific and changing supply and demand factors relating to local real estate conditions, into fictional interest rates, likely to lead to some very apples to oranges comparisons.

Many commentors believe that the proposed standard would create strong incentives for tenants to prefer shorter leases, with more options, which they already prefer for business flexibility. Property types with traditionally long leases, which are therefore viewed as stable and good investments and good collateral for loans, will thus become substantially more volatile, negatively affecting value and financeability — and just at a time when values are starting to recover.

In corporate real estate, the trend over the past decade has been to move real estate off the books so as to enhance return on assets. If the new guidance requires that a leasehold interest be on the books, this trend may reverse.

One highly predictable result of implementation of the new standard is that there is going to be a lot more accounting work. The proposed guidance calls for substantially more data management, complexity, guesswork and analysis than the existing standards for leases. For that reason, one can expect strong support for the new standards from manufacturers of lease management software, and, of course, accountants.

FASB is accepting public comments on the proposed standard until December 15, 2010."

"National Fulfillment Services signed a long-term lease for 125,000 square feet of warehouse space located at 105 Commerce Dr. in Aston, PA.

National Fulfillment will consolidate two separate facilities into this new location. Upon completion, the tenant's new headquarters will accommodate over 20,000square feet for their corporate office and call center needs, and over 100,000 square feet of warehouse space.

Located in the I-95 Industrial Park, 105 Commerce is a 375,000-square-foot industrial distribution building owned by TA Associates."

Saturday, January 15, 2011

"While the real estate investment market is still shrugging off some doldrums, investors are increasingly turning to buying apartments.

A spate of local apartment sales closed at the end of the year. Among the recent transactions are Korman Communities selling two apartment complexes in Northeast Philadelphia for $55.5 million, Capmark Financial unloading a property in Philadelphia for $7 million, Korman Residential buying the Woods complex in Ambler for more than $30 million, and Morgan Properties paying to buy out two partners’ interests in 76 apartment properties with 15,000 units valued at $1.5 billion.

Some owners have also decided now might be a good time to seize on the enthusiasm for apartments. For example, Red Rocks Group has the Coventry at Glenn Mills on the market and O’Neill Properties Group is seeking to sell Londonbury in Conshohocken.

Interest in multifamily apartments has gained favor for several reasons. It’s one of the few areas where financing can be arranged through government entities Fannie Mae and Freddie Mac. As homeownership has gotten out of reach for some people because of job loss, cuts in pay or bad credit, renting has become more common. Investors also view it as a stable asset for the future as opposed to office space, which still suffers from a lack of job growth.

The Philadelphia area apartment market also continues to be robust. Class A vacancy rates are down to a tight 2.7 percent compared with 5.4 percent at the end of 2009, according to Delta Associates year-end research. The overall market is also seeing low vacancy rates. In Center City, it stands at 2.4 percent (down from 4.7), the Pennsylvania suburbs are at 3.1 percent and South Jersey fell to 2.3 percent from 6.5 percent at the end of 2009. Rent growth is also strong though ranges from a 17 percent jump in Center City to a 6.5 percent in the suburbs, according to the Delta data.

The market conditions have also helped drive up investor interest.

Rushwood, a 392-unit complex at 10825 E. Keswick Road, sold for $34 million, and Winchester Walk, which has 318 units at 2600 Welsh Road, traded for $21.5 million. Korman Communities developed the properties 60 and 40 years ago, respectively, and both were fully occupied at the time of sale. Greystar Real Estate Partners of Charleston, S.C., bought the complexes.

While they were sold as part of estate planning purposes, bringing them to market had a lot to do with timing, Iman said. “There were enough signs of a recovery to be out at the beginning of the year,” she said. “I think being one of the first large offerings out there, we received a significant amount of response. We spoke to over 350 investors.”

What also helped is Philadelphia’s multifamily market is constrained. It has high barriers to entry and few new apartments are constructed annually, and Greystar was able to enter the Philadelphia area with a foothold of more than 700 units.

Professional Realty Advisors, saw “tons of interest” for the Axis, a 136-unit apartment building at 20 S. 36th St. in Philadelphia. More than 220 investors looked at the property and 22 offers were made, Mattson said.

The building caters to Drexel University and University of Pennsylvania students. Once called the Stratum when it was first converted from the Divine Tracy Hotel, the property had been 74 percent occupied when it was foreclosed up by the lender. Altman Management Co. of Fort Washington bought the property, which was 95 percent occupied at the time of the closing.

In another deal, Korman Residential picked up the Woods, a 321-unit complex at Butler Pike and Susquehanna Road in Ambler, from RREEF. It has 27 garden-style buildings, a clubhouse and a single-family home that is also a rental on 27 acres. Its occupancy is at about 95 percent. The company bought it to get into an area of Montgomery County it wanted to have a presence in for a while.

The biggest transaction came from Morgan Properties of King of Prussia. It bought out its institutional partners’ interest, giving Morgan full control over nearly all of its portfolio. How much Morgan paid wasn’t disclosed but the real estate is valued at $1.5 billion.

The buyouts took place in three separate transactions during the fourth quarter and were funded with “internal equity sources,” the company said in a statement without elaborating. Morgan Properties now owns 100 percent interest in 94 of the 99 properties in its portfolio."

"A Dutch life sciences company that provides antibodies and antibody-based products to researchers involved in immunology and cell biology, has opened a U.S. subsidiary in the Philadelphia region.

Hycult Biotechnology of Uden, Netherlands, has established Hycult Biotech Inc. in Plymouth Meeting.

Last week, the company named Dino DiCamillo as executive director of its new subsidiary.

DiCamillo is also president and CEO of Percorso Life Sciences. Percorso is a Plymouth Meeting consulting firm that works with early-stage technology companies and foreign companies looking to establish a U.S. presence. He previously served as vice president of Advanced Research Technologies, president of Alfa Wassermann Proteomics, vice president of environmental diagnostics at Invitrogen, and president of Dynal Biotech Inc.

DiCamillo said Hycult is starting out with a staff of six full- and part-time workers, but he expects that number to grow to “10 full-time equivalents” within two years.

“Hycult Biotech offers a broad and unique technology specific to researchers who focus on the innate immune system,” DiCamillo said. The human innate immune system is made up of the cells and other mechanisms that provide the body’s first response to combating foreign pathogens.

DiCamillo said Hycult was looking in the area between Boston and Washington, D.C., for offices to build its brand in the United States, and decided on the Philadelphia region because the company already had relationships with scientists at the University of Pennsylvania and the region has a strong supply of immunologists. He added the tax climate in Pennsylvania was favorable."

"Warehousing and transportation services company, GWSI, Inc., has signed a multi-year lease to expand into an additional 100,000 square feet of warehouse space at Building A-2 in the Riverbridge Industrial Center on West Front St. in Chester, PA.

The Riverbridge Industrial Center is a multi-building complex totaling approximately 500,000 square feet of industrial space. GWSI, Inc. originally occupied 75,000 square feet in building A-1 before deciding to expand into building A-2."

Friday, January 14, 2011

"Materials Processing Corp. said it will open a facility in Northeast Philadelphia by March 31 to handle corporate clients' discarded computers and other information-technology equipment. The state provided $230,000 in funding: a grant, job-training assistance, and tax credits for creating at least 90 jobs within three years, the firm said. MPC, of Mendota Heights, Minn., said the Decatur Road site is intended to keep old equipment out of landfills by recycling and remarketing."

"Insurance provider FutureScripts signed an 11-year lease for 22,702 square feet at 1650 Arch St. in Philadelphia. The company will occupy the entire 26th floor in the second quarter of 2011.

The Class A office building, constructed in 1974 and renovated in 2001, features a grand lobby with finished terrazzo floors and travertine marble wall panels, full service café, and 24-hour security. Located in the city’s central business district, the 27-story office tower with a two-level basement has 553,349 rentable square feet."

At about 135,000 square feet, the stores will offer basic fresh produce, fresh packaged meat and baked goods, and employ 100 to 250 team members.

The new SuperTarget, opening in Woodbury, MN, will feature a full-line, full-service supermarket, including a bakery and deli and certified organic produce. At about 174,000 square feet, it will also feature all the amenities of a general merchandise store and employ 200 to 300 team members."

"Tasty Baking Co. in Philadelphia reported that preliminary financial data available for its fourth quarter ended Dec. 25, 2010, indicates that as a result of certain production difficulties during the optimization of its new Philadelphia bakery the company did not achieve the expected operational cash savings from this bakery during the fourth quarter.

Further, due to the lower than expected cost savings and other factors, including the impact of the recent bankruptcy filing by The Great Atlantic & Pacific Tea Company Inc. (A&P) and the sharp rise in commodity costs, the company is currently experiencing extremely tight liquidity.

"As of Nov. 1, 2010, our expectation was that a run rate of $13 million in annualized pre-tax cash savings, net of facility leases but before debt service, would be achieved by the end of the fourth quarter of 2010," said Charles P. Pizzi, president and CEO of the snack food company. "Due to unanticipated operational challenges, the run-rate savings at the end of the fourth quarter of 2010 is now expected to be $10 million."

In response to these circumstances, the company is actively pursuing two parallel processes.

First, the company has entered into discussions with its bank group led by Citizens Bank to explore various alternatives to address its current liquidity needs, including increasing the amount of funds available under the company's bank line of credit, as well as addressing the current and future covenant requirements under the company's credit agreement.

While discussions are ongoing, the bank group has agreed to defer until the end of this week all principal payments and credit facility reductions. In addition, the lenders for the company's loans from the PIDC Local Development Corp. and the Machinery and Equipment Loan Fund of the Department of Community and Economic Development of Pennsylvania, along with the landlords for the company's leases at the new bakery and its office headquarters in Philadelphia, have also agreed to defer until Jan. 31, 2011, certain payments due under their loans and leases.

Second, the company has retained Janney Montgomery Scott LLC as its financial advisor to assist the company in its evaluation of various possible financial and strategic options including refinancing the company's long-term debt due in September 2012, raising additional capital, a potential combination with another company as part of the consolidation occurring in the baked goods industry or a potential sale of the company.

At this time, there can be no assurance that the bank group will increase the line of credit or make any changes to current or future covenant requirements or that any transactions will occur or, if undertaken, their terms or timing.

During the process, the company will continue to operate its two bakeries and produce, distribute and sell Tastykake products to its customers and consumers.

"While this has been a challenging period for us operationally, we remain focused on growing the business," Pizzi said. "To that end we continue to partner with new grocery and convenience store customers within our core markets, increase penetration with key customers, and launch new products into the marketplace. Finally, despite the challenges we have faced, we have continued to outpace the category and grow our overall market share."

Thursday, January 6, 2011

"Apple REIT Nine, Inc. is the new owner of the Courtyard Marriott located at 600 Campus Dr. in Collegeville, PA. The property was purchased from Gulf Creek Hotels for $20 million, or about $151,500 per room.

The 78,911-square-foot, five-story hospitality building is currently operating as a Courtyard Marriott. It was built in 2005, sits on 10 acres, and is located just off of Route 422, the Pottstown Expressway."

Sofitel Philadelphia is a 14-story property at 120 S. 17th St. in the Market Street West area of Philadelphia that was built in 1965 and renovated in 2000. The hotel contains a bar, business center, fitness center, restaurant and other amenities.

The buyer assumed the $56.1 million loan that was included in the $87 million sales price."

"West Pharmaceutical entered into a build-to-suit lease agreement with 530 Regency Drive Associates LP for the construction of a new global headquarters building in Eagleview Corporate Center in Exton, PA.

The new building will be 2 miles from its current headquarters in Lionville, PA.

Under the lease, the landlord will construct, furnish and equip 130,000 rentable square feet of office space and 41,000 rentable square feet of laboratory and research space.

The lease term will commence by about January 2013 and expire 15 years later. West Pharmaceutical has options to extend the lease for two additional terms for a total of 10 years.

The annual base rent in 2013 is expected to be about $4 million per year, including certain tenant improvements which may be funded by the landlord."

"Liberty Property Trust will break ground this afternoon on two flex buildings at the Navy Yard Commerce Center, bringing to the Philadelphia office market a type of product that has been available only in the suburbs.

The two one-story buildings, which will total 103,137 square feet, will offer glass and precast fronts with rear loading docks. Their interiors are designed as flexible space - easily adaptable to suit each tenant's requirements.

Flex buildings are appealing to entrepreneurial companies that often need a mix of space, for instance offices and laboratories, said John Gattuso, regional director for Liberty Property Trust. They are common in California's high-tech Silicon Valley and, closer to home, along the Route 202 corridor in Chester County.

The Navy Yard buildings, valued at close to $17 million, will be adjacent to and north of the new Tasty Baking Co. facility - and part of the newest business park within the Philadelphia Navy Yard, located on its western edge. More than 522 acres of the Navy Yard have been under redevelopment the last seven years, attracting a variety of businesses - from clothing giant Urban Outfitters to a number of high-technology companies.

The two flex buildings, to be developed along with Synterra Partners, a Philadelphia business that Liberty has teamed with at the Navy Yard to meet minority enterprise requirements, constitute Liberty Property's first construction work in more than 20 months, Gattuso said. About $13 million of the financing is through a stimulus program known as Recovery Zone Facility Bonds.

"The fact that our first effort in 20 months is here does say something about the Navy Yard and Philadelphia," Gattuso said. "This is clearly a vote of confidence in this particular regional economy."

The new buildings' core and shell are expected to be completed by August. Liberty Property has signed a lease for 21 percent of the space with Fretz Kitchens, a provider of high-end kitchen products located in Northeast Philadelphia."

About Me

Joe O’Donnell has been in commercial real estate for over 15 years. His expertise is the corporate tenant/buyer representation as well as landlord for office, industrial and retail buildings. He primarily works the surrounding Montgomery, Chester and Bucks County markets.